The pre-pandemic Indian economy was one of the fastest growing in the world, but it also had one of the highest unemployment rates. Though it is not the business of government to be in business, it has a duty to promote job creation. India needs to create 100 million more jobs by 2030. Job creation is the biggest development challenge that the country faces.

While the the link between economic and job growth is well-recognised, uncertainties remain. In India, will more jobs be created by new, young and small enterprises or large/established firms? Second, will more jobs be created in mega cities or Tier 2/3 cities? And, third, how will the fourth industrial revolution and artificial intelligence impact job creation?

These questions provide insights into what policy-makers can do now to scale up the pace of job creation. There is strong empirical evidence from more than 300 districts in India that jobs are created by young/small firms, and not large/established ones. Unfortunately, although there is an upward trend in the entry of new firms, this has not been strong enough to absorb the 10 million or so new workers who join the labour force every year.

India still has one of the lowest entrepreneurship rates in the world for its stage of development. What can promote entrepreneurship? Improving the business climate, less regulation, lower taxes, and scaling up investments in physical and human infrastructure are seen as factors that drive entrepreneurship even in developed countries.

Empirical evidence from districts in India suggests that anticipation of abnormally high returns on investment, less regulation and business environment are not the key drivers of entrepreneurship. The most important factors are investments in human and physical infrastructure. Districts that have improved their infrastructure, provided a supportive industrial structure for input and output markets, and those that have small local suppliers have shown a faster growth rate in entrepreneurship and jobs.

This pattern is seen in both the manufacturing and service sectors. In India, urbanisation and job growth moved in tandem in the early 1990s, but this changed during the last decade. Mega cities and their outskirts have become too costly, forcing manufacturing enterprises to move to Tier 2/3 cities to remain competitive. Unfortunately, India’s spatial development process has been too slow to accommodate the transition of manufacturing hubs to medium-size cities.

Well-balanced strategy

Unlike in China and the US, the medium-size cities and small towns have struggled with a poor infrastructure. Job growth will benefit from a well-balanced strategy that shifts its focus from mega cities to small towns, promotes competition between urban centres, and strengthens collaboration between the Centre and the States. This has potential for a four-fold increase in job growth and per capita income.

How has the fourth industrial revolution impacted the pace of job creation in India? Unlike China, which has been a formidable exporter of manufactured goods, India has acquired a global reputation for exporting services. Indeed, India has leapfrogged the manufacturing sector, going straight from agriculture into services — a path that offers hope to late-comers to economic development.

The policy message is clear. For India to create 100 million additional jobs, it has to increase the pace of entrepreneurship. There are many policy levers that can be used. The highest priority is to scale up investments in human and physical infrastructure. It is worrying that India ranks low in most global rankings in physical infrastructure, at a time when India is striving to benefit from the shift away of manufacturing powerhouse from China.

The current global “savings glut” in developed countries, and an “investment dearth” in developing countries, has made India much more attractive to international investors. Global investors are optimistic about future infrastructure projects. India also ranks low in the global ranking of human infrastructure, with poor ratings on education, skills, life expectancy and health.

India’s learning outcomes and health indicators have shown little or no improvement. The pace of job creation cannot be scaled up without increased investments in education and skills. There is an urgent need to dramatically improve the reach, quality, and timeliness of access to education and health. This could be done by promoting and forming global partnerships with leading education and health institutions.

The rising middle class provides a big market for global institutions to form partnerships with local institutions. Investing in education and skills, especially in children’s early years, is a critical down-payment now to scale up the pace of job creation and growth in the future.

Also, huge distortions in factor markets have made it difficult for new/young enterprises to access land, labour and capital, as they are often crowded out by large/established firms. With stronger networking, well-established firms manage to get land. which they use as collateral to get bank loans as well.

In India, the land and capital markets are much more distorted than labour markets. Recent reforms in labour regulations will encourage start-ups and job creation, but much more needs to be done on the land and capital market fronts, as these are particularly important for new and small enterprises.

Services sector

The relative size of the service sector in India is large for its stage of development. This should be taken advantage of, as the potential for job creation is huge. Recent consumption expenditure data show that the manufacturing sector is slowly losing steam and select services sectors are gaining momentum. Services such as healthcare and care-giving (children/elderly care) can generate a large number of jobs. The Covid crisis is a testimony to that.

Due to its cost advantage, India can export healthcare services in a big way. Also, setting up educational institutions and strengthening the existing ones will help create a large number of jobs down the line.

As income grows, jobs in sectors like leisure, arts/entertainment and housing will grow at a faster pace. Also, computer scientists/engineers, IT administrators, architects, carpenters, plumbers, construction workers, and machinery operators will continue to be absorbed in large numbers.

The other sector which could potentially create jobs relate to energy and climate change. Not to forget, urban India will continue to absorb a large number of domestic workers, both men and women.

Das is Professor at IIM Ahmedabad, and Ghani is Senior Fellow at Pune International Centre